I'm back with the latest and greatest updates on the market, notable DeFi yields, emerging risks, and major DeFi lending protocols.

Welcome to the State of DeFi Yields Newsletter! Let's dig into this week's issue.

Market Overview

Crypto markets finally saw a catalyst to move higher, as the price of ETH rose by 15.35% since the last issue came out. The positive development in ETH's price action and across crypto markets came after the US Federal Reserve announced they were cutting interest rates by 50 basis points. As yields for US Treasuries drop in traditional markets, onchain yields become more attractive for investors.

ETH funding rates moved in a bullish direction, with the median funding rate at 11.39%. The highest ETH funding rate is 19.77% and the lowest at 4.09% on major exchanges. According to Coinalyze, 69.36% of traders are long ETH and 30.64% are short ETH over a one-day timeframe. The change in ETH funding rates is a good sign and it begs the question–are we back?

Onchain Base Rate

• Current Onchain Base Rate: 6.99%

• Sky Savings Rate (SSR): 6.25%

If the Onchain Base Rate is any indication, then we're at least back on track. The Onchain Base Rate stands at 6.99%, a 49% increase since last week's issue. The Onchain Base Rate is now higher than the SSR, as well. High yields across Morpho, Aave v3, and Fluid markets are responsible for the big jump.

Compare this to current rates for short-term US Treasuries (3M UST: 4.60% | 6M UST: 4.37% | 12M UST: 3.89%), and it's clear the US Fed's interest rate cut had a major impact on DeFi's competitive edge. Whether it's supplying stablecoins to a Morpho Vault or using Contango for recursive yield strategies across lending markets, double-digit yields abound in onchain lending markets.

Read through the Notable Yields section for more than a dozen different examples of great yield opportunities.

Notable Yields

I've picked out a variety of different yield sources and provided a brief description below. All data was sourced from the DefiLlama Yields page.

Morpho + Morpho Vaults (Base) | Gauntlet EURC Core Vault

Projected APY: 42.68%

Circle's Euro (EURC) stablecoin launched on Base in July, and several Morpho Vaults and markets have begun supporting EURC. Gauntlet's EURC Core Vault launched 13 days ago, with the initial surge in APY stemming from initial demand in the following markets:

• cbETH collateral / EURC loan | 19.04% APY with 156,614.24 EURC supplied

• wstETH collateral / EURC loan | 19.47% APY with 31,780.14 EURC supplied

• WETH collateral / EURC loan | 19.11% APY with 30,000.05 EURC supplied

• cbBTC collateral / EURC loan | 10119.13% APY with 1,000 EURC supplied

As this market grows, the APY will come down, but based on initial demand, borrowers are hungry to take out EURC loans in the Morpho Base Markets.

Worried about smart contract and economic risk in this vault and the underlying Morpho markets? You can buy Morpho + Morpho Vaults Bundled Protocol Cover from Nexus Mutual or request to join OpenCover’s open beta period for the Base DeFi Pass, all-in-one protection across Morpho and several other DeFi protocols on Base that's priced at just 3.99%.

Uniswap v3 (Ethereum) | GHO-USDC Pool (0.05%)

Projected APY: 39.22%

30-Day Average APY: 34.55%

Aave v3's GHO stablecoin recently surpassed the 150M circulation mark, which is a significant milestone for Aave's one-year old stablecoin. Between the Merit Program and onchain yield incentives for DEX liquidity, GHO has been a reliable source of yield for users. Anyone looking to acquire GHO without borrowing it in the Aave markets inevitably swaps for the asset on their DEX or DEX aggregator of choice, which means attractive yields for LPs.

Uniswap v3 LPs in the GHO-USDC Pool (0.05%) have been earning 34%+ over the last month, with today's projected yield at nearly 40%. If you're looking for an LP with minimal impermanent loss risk and double-digit yields, this pool is worth checking out.

Contango (Base) | wstETH/ETH on Morpho Market

Projected ROE: 24.71%

As I noted in last week's issue, Contango makes recursive looping strategies as easy as possible. That means it involves leverage, and your borrowed assets are being deposited back as collateral to maximize the yield. The yield for this market has increased since last week, with the wstETH/ETH Morpho strategy projected to return 24%+ at the moment.

Worried about smart contract and economic risk on Contango and the underlying Morpho markets? You can buy Contango + Morpho Bundled Protocol Cover from OpenCover.

Beefy Finance (Base) | DOLA-USDC sLP Vault

Projected APY: 24.48%

30-Day Average APY: 16.58%

Inverse's DOLA stablecoin has been another steady source of yield on Base since the Inverse Finance team has accumulated a large veAERO position to bribe Aerodrome pools and boost yields for LPs.

If you want to earn double-digit yields on stablecoins but don't want to take on the market risk of holding AERO, you can deposit in this Beefy vault, which automatically harvests the AERO and reinvests it in the underlying Aerodrome pool to compound your rewards and boost your APY.

Worried about smart contract risk in this Beefy Finance vault and the underlying Aerodrome pool? You can buy Beefy + Aerodrome Bundled Protocol Cover from OpenCover or request to join OpenCover’s open beta period for the Base DeFi Pass, all-in-one protection across Beefy, Aerodrome and several other DeFi protocols on Base that's priced at just 3.99%.

Extra Finance (Base) | USD+ Lending

Projected APY: 20.05%

30-Day Average APY: 20.31%

If you have USD+, the yield-bearing stablecoin index from Overnight Finance, you can earn 20% as a lender on Extra Finance. Leverage farmers have shown high demand for USD+, which means great yields for lenders.

Worried about smart contract and economic risk in the Extra Finance markets? You can buy Extra Finance Protocol Cover from OpenCover or request to join OpenCover's open beta period for the Base DeFi Pass, all-in-one protection across Extra Finance, Overnight Finance and several other DeFi protocols on Base that's priced at just 3.99%.

Morpho + Morpho Vaults (Ethereum) | Gauntlet USDC Prime Vault

Projected APY: 21.26% + 52.95 MORPHO

Gauntlet's USDC Prime Vault on Morpho has seen a boost in demand from borrowers since last week, with the vault's APY jumping north of 20%. The WBTC and wstETH markets have shown the greatest demand, with the lion's share of vault TVL. This vault supplies USDC to the following markets:

• WBTC collateral / USDC loan | 20.73% APY with 8,396,043.95 USDC supplied

• wstETH collateral / USDC loan | 21.93% APY with 6,818,193.12 USDC supplied

• cbBTC collateral / USDC loan | 11.49% APY with 14,390.89 USDC supplied

Worried about smart contract and economic risk in this vault and the underlying Morpho markets? You can buy Morpho + Morpho Vaults Bundled Protocol Cover from Nexus Mutual.

Morpho + Morpho Vaults (Ethereum) | Steakhouse USDC Vault

Projected APY: 21.08% + 52.95 MORPHO

Steakhouse's USDC Morpho Vault has also seen an increase in demand from WBTC and wstETH borrowers, who have snapped up most of the available liquidity in the vault and boosted the APY for lenders. This vault supplies USDC to the following markets:

• WBTC collateral / USDC loan | 20.73% APY with 31,086,581.21 USDC supplied

• wstETH collateral / USDC loan | 21.93% APY with 13,264,352.95 USDC supplied

• cbBTC collateral / USDC loan | 11.49% APY with 54,142.96 USDC supplied

Worried about smart contract and economic risk in this vault and the underlying Morpho markets? You can buy Morpho + Morpho Vaults Bundled Protocol Cover from Nexus Mutual.

Beefy Finance (Ethereum) | GHO/fxUSD Vault

Projected APY: 19.75%

30-Day Average APY: 19.11%

AaveDAO service providers have been boosting incentives for GHO LPs for onchain DEXes, with f(x) Protocol as a standout partner and yield provider. If you want to farm yield with two decentralized stablecoins and low impermanent loss risk, this Beefy vault is worth checking out.

You can deposit in this Beefy vault, which automatically harvests the LP's trading fees and any token reward it earns and reinvests in the underlying Curve pool and f(x) Protocol farm to compound your rewards and boost your APY.

Worried about smart contract risk in this Beefy Finance vault and the underlying Curve pool? You can buy Beefy + Curve Bundled Protocol Cover from OpenCover.

Morpho + Morpho Vaults (Ethereum) | Block Analitica + B.Protocol Flagship USDC Vault

Projected APY: 19.61% + 52.95 MORPHO

Block Analitica & B.Protocol's Flagship USDC Morpho Vault has lower USDC liquidity than the Gauntlet and Steakhouse Morpho Vaults, but it has an APY in the same range as the others, nearing 20%. This vault supplies USDC to the following markets:

• wstETH collateral / USDC loan | 21.93% APY with 172,623.33 USDC supplied

• sDAI collateral / USDC loan | 5.46% APY with 14,627.46 USDC supplied

Worried about smart contract and economic risk in this vault and the underlying Morpho markets? You can buy Morpho + Morpho Vaults Bundled Protocol Cover from Nexus Mutual.

Extra Finance (Base) | USDC Lending

Projected APY: 18.62%

30-Day Average APY: 11.88%

Extra Finance USDC lenders on Base have been earning great yield, as demand from leverage farmers continues to drive lending rates well above the Onchain Base Rate.

Worried about smart contract and economic risk in the Extra Finance markets? You can buy Extra Finance Protocol Cover from OpenCover or request to join OpenCover's open beta period for the Base DeFi Pass, all-in-one protection across Extra Finance and several other DeFi protocols on Base that's priced at just 3.99%.

Contango (Optimism) | wstETH/ETH on Aave V3 Market

Projected ROE: 15.14% + 11.41% in OP Rewards

The wstETH/ETH Aave v3 strategy on Contango has seen a sizable increase in yield since last week's issue, with the base APY increasing from 2.23% last week to 15.14% this week. The added 11%+ in OP rewards doesn't hurt either.

Worried about smart contract and economic risk on Contango and the underlying Aave markets? You can buy Contango + Aave v3 Bundled Protocol Cover from OpenCover.

Contango (Base) | rsETH/ETH on Compound V3 Market

Projected ROE: 14.14% + 5.15% in COMP Rewards

The rsETH/ETH Compound V3 strategy on Contango has also seen an increase in both the base yield and the COMP rewards, with the base yield increasing from 10.26% last week to 14.14% this week and COMP rewards increasing from 2.50% last week to 5.15% this week. Another great yield opportunity on Base!

Worried about smart contract and economic risk on Contango and the underlying Compound v3 markets? You can buy Contango + Compound v3 Bundled Protocol Cover from OpenCover.

Toros Finance (Arbitrum) | Ethereum Yield (ETHy)

Projected APY: 5.16%

30-Day Average APY: 63.38%

In the last year, Toros Finance has grown from $7M to nearly $50M in TVL, with TVL above $100M in July 2024. The dHEDGE team is the same one behind Toros Finance, which is a yield platform built on top of the dHEDGE protocol. Their Ethereum Yield (ETHy) vault on Arbitrum has a lower yield this week at 5.16%, but its 30-day average APY according to DefiLlama is 63.38% and 39.86% according to the Toros Finance UI. Not bad for ETH yields.

This vault uses a leverage strategy in the Compound V3 market on Arbitrum to farm yield, with a small percentage of the vault held in Origin's wOETH token. You can check out the dHEDGE analytics page for this vault to learn more about the strategy.

Worried about smart contract and economic risk in the dHEDGE protocol underneath Toros Finance? You can buy dHEDGE Protocol Cover from OpenCover.

DeFi Risk Updates

Over the last week, I've seen several crypto websites hijacked by attackers (i.e., a frontend attack), where attackers were able to prompt users who interacted with the site and connected their wallet to sign a malicious approval request that allowed the attacker to steal funds from users’ wallets.

We often talk about protocol hacks/exploits since they've resulted in many billions lost since DeFi emerged, but this isn’t the only risk we face in Web3. In the last several months, I've seen more frontend attacks occur due to the Squarespace migration debacle in July and other factors than I believe I've seen since I first got involved in DeFi in 2020.

There are some simple steps you can take to protect against this attack vector, so you don't sign a malicious transaction. You can use a malicious transaction detection tool like Pocket Universe, which can warn you if you're prompted to sign a malicious transaction. Pocket Universe detected both the Ethena frontend attack that occurred last week and the Etherfi frontend attack that occurred this week. If Pocket Universe fails to detect a malicious transaction, they have Transaction Cover through OpenCover which will reimburse users up to $20,000 each for any losses incurred.

There are other tools like Wallet Guard that can detect malicious transactions and provide you with a warning. Some wallets like Rabby have built-in detection software to alert their users if a malicious transaction is detected. I would recommend anyone active in DeFi do their research on these tooling and wallet solutions to protect themselves against frontend attacks. Personally, I use a GridPlus Lattice1 hardware wallet, which has a large human-readable screen where I can read transaction details ahead of signing, and MetaMask with the Wallet Guard Snap enabled to detect any potentially malicious transactions.

Don't fall prey to these frontend attacks. Take a few precautions to stay safe out there, reader. You’ll thank yourself for it later.

Review of Onchain Lending Markets

As always, a lot happens in one week’s time. Here’s a recap of the biggest developments in the major onchain lending markets.

Aave v3

Aave has seen another week of growth, with TVL rising from $11.15B to $11.52B. After AAVE holders voted to onboard cbBTC, the Ethereum and Base markets saw immediate growth. Each cbBTC market reached its supply cap shortly after cbBTC was onboarded. Chaos Labs recently executed a supply cap increase in the Ethereum market from 450 cbBTC to 900 cbBTC and an increase in the Base market from 200 cbBTC to 400 cbBTC. The cap on Ethereum has almost been reached (835.17 cbBTC supplied) within 24 hours of execution and the Base supply (242.14 cbBTC) will likely hit the cap by end of week, if the trend carries over to the Base market. This represents 31.72% of the total cbBTC supply at present according to the cbinstitutional_team's Coinbase Wrapped BTC (cbBTC) Dune dashboard.

The ACI and Karpatkey have also proposed creating a new Aave v3 instance to open a GHO credit line for Gnosis DAO, a major step forward in treasury management. As part of this proposal, Gnosis DAO would be the sole borrower in this instance where they can deposit GNO and wstETH collateral to borrow GHO, so Gnosis DAO can readily access stablecoins without selling their crypto assets. The GHO interest rate would be set at the same rate as the DAI Savings Rate (DSR). To begin, the proposal outlines a 5M GHO credit line with the potential to increase this limit based on AaveDAO service provider analysis and feedback. This is an exciting development for both communities and another potential source of revenue for AaveDAO.

Bored Ghost Development Labs (BGD Labs) have shared that the Aave v3.2 upgrade ha moved to the ARFC Snapshot phase for pre-approval of the upgrade. If approved, this would represent a major improvement in Aave v3's risk management controls.

And in other news, LlamaRisk shared a proposal to adjust WBTC's Loan-to-Value (LTV) to zero (0) as a precautionary measure to prevent any WBTC suppliers from increasing their debt positions while BitGo completes the transition to the new partnership with BiT Global. This comes on the heels of LlamaRisk's due diligence on BitGo and BiT Global. They indicated in their post that they signed an NDA to conduct their due diligence, so they are unable to share all the information they've gathered. This proposal was met with resistance from other AAVE holders such as thegreenmongrel, Marc Zeller, EzR3al, and eboado. The core consensus was that reducing WBTC's LTV to too drastic at this time.

Chaos Labs worked with LlamaRisk to propose an adjustment to WBTC's risk parameters across the Aave markets. They've proposed decreasing supply and borrow caps for all WBTC markets to a level 15% higher than current utilization; decreasing the liquidation threshold for WBTC by 1%; reducing LTV to 70% for all markets where it is currently higher than this value; and increasing the reserve factor from 20% to 40% across the Arbitrum, Optimism, Polygon, Ethereum and Avalanche markets. LlamaRisk has endorsed this adjustment, as they continue to work on their due diligence with BitGo and BiT Global.

While some AAVE holders indicated that changing parameters drastically for WBTC holders could cause undue harm, it seems to me that AaveDAO's risk providers are doing their best to avoid another CRV-like bad debt scenario if WBTC liquidity continues to erode as confidence in WBTC falls further.

Morpho

Yields across Morpho Vaults have surged, as the WBTC collateral markets have seen increased demand following Sky Protocol's decision to offboard WBTC from their vaults. The WBTC users may have moved into both the Aave and Morpho markets but individual Morpho markets provide a higher Liquidation Loan-to-Value than Aave v3, which is likely the reason for increased demand in these Morpho markets.

The Gauntlet USDC Prime, Steakhouse USDC, and Block Analitica & B.Protocol Flagship USDC Morpho Vaults on Ethereum are all earning USDC lenders 19%+ APY. Each of these Morpho Vaults has significant demand from WBTC and/or wstETH holders that are borrowing against these two collateral assets.

• Gauntlet USDC Prime Morpho Vault. This vault has 15.22M USDC supplied, and Gauntlet has allocated 55.13% of the USDC to the WBTC market where it's earning 21.61% APY and 44.77% of the USDC to the wstETH market where it's earning 21.32%. This represents the vast majority of the USDC allocations for this vault.

• Steakhouse USDC Morpho Vault. This vault has 44.41M USDC supplied, and Steakhouse has allocated 69.99% of the USDC to the WBTC market where it's earning 21.61% APY and 29.88% of the USDC to the wstETH market where it's earning 21.32%. This represents the vast majority of the USDC allocations for this vault.

• Block Analitica & B.Protocol Flagship USDC Morpho Vault. This vault has 187.26K USDC supplied, and Block Analitica & B.Protocol have allocated 92.18% of the USDC to the wstETH market where it's earning 21.32%. This represents the vast majority of the USDC allocations for this vault.

The new Gauntlet EURC Core Morpho Vault and Block Analitica & B.Protocol Moonwell Flagship EURC Morpho Vault on Base both have high APYs for lenders, with each vault generating 42.68% APY and 30.05% APY respectively. These vaults are new, and as TVL in each vault grows, the yields will likely come down. However, demand to borrow EURC appears to be high based on initial activity.

On 24 September, MEV Capital announced the launch of their Usual Boosted USDC Morpho Vault on Ethereum on the Morpho forum. This brand new vault offers 7.67% APY + MORPHO rewards. Borrowers will likely farm Usual Pills (i.e., points) using leverage, so demand for USD0+ is likely to grow over time once the word gets out. It's worth reading through MEV Capital's forum post and checking out the market for yourself.

Euler v2

Euler v2 launched earlier this month and new Euler markets are launching every week. While borrow rates across many markets are still well below rates on other lending protocols, the supply APY in the Re7 Labs Renzo WETH market is a whopping 61.22% at the time of writing. Euler also launched an XP points campaign last week. It's unclear what the points will lead to based on their blog post, but there will be three (3) seasons of the Euler XP campaign.

Euler v2's TVL currently sits at $5.12M, an increase from last week. I'm hopeful for the future of Euler v2. However, it's going to be a fight to gain market share in this competitive market segment.

For borrowers, Euler v2 offers some truly low borrow rates. Let's see if low borrow rates and points can pull in more users in the coming weeks.

Sky

MakerDAO is now Sky Protocol, and their frontend is called Sky Money. I believe I had this backwards last week. To make life easier for you and me, I'll simply refer to it as Sky going forward. This rebrand took effect along with the transition to USDS, the new stablecoin, kicked off on 18 September. To be clear, you can still hold DAI. It's a good hunch that Sky is going to put most of their incentives and support behind USDS going forward, though.

To date, USDS has grown to a total circulating supply of 506,160,815 compared to DAI's 3,049,763,862 total circulating supply. For less than one (1) week, that's not too bad. Sky currently offers 6.25% for USDS deposits in the Sky Savings Rate (SSR) contract, while USDS holders can also stake their stablecoins in the Sky Protocol to earn SKY Token Rewards. If you hold USDS, you have to choose between the SSR and the SKY Token Rewards program.

USDS stakers can earn their proportional share of 600M SKY tokens per year. Currently, 387M+ USDS is staked in the UsdsSkyRewards StakingRewards contract on Ethereum. If you live in the United States or United Kingdom, I'm afraid you're shit out of luck. Sky Money blocks residents from these countries, as well as anyone who uses a VPN to access their frontend. To quote two modern philosophers from the United States, "...the government totally sucks." Rune has shared before that the regulatory environment in these countries has led the Sky community down this path to outright blocking users at the UI level.

Fortunately, if you're savvy enough, you can still deposit to the SSR vault or the UsdsSkyRewards StakingRewards contract on Etherscan.

Takeaways for this Week's DeFi Yields Report

For the first time in months, we're seeing positive movement in ETH price. Traders are signalling a return to more bullish sentiment, though a lot still rides on the US election and trends in TradFi markets. Nonetheless, the Onchain Base Rate is the highest it has been in quite some time. The rate cut news has been a boon for crypto markets, and I hope for more news like this–for your sake and mine.

The discussion around WBTC remains tense across DeFi. It seems everyone who signs an NDA and discusses specifics with BitGo comes away with an uneasy feeling, there's little that can be shared given said NDA. If BitGo wants to earn people's trust, they need to provide greater transparency than has previously been provided. I wholeheartedly agree with eboado's comment on the Aave forum:

To be clear, @LlamaRisk did an outstanding work. What I think we additionally need is also Bitgo/Bitglobal transparently disclosing everything required from their side. Or simply giving as much access to LlamaRisk as they request, given they officially represent Aave.

Beyond the WBTC drama, lending markets have seen a major uptick in yields this week, while recursive strategies are yielding APYs not seen since Spring. Right now, there's more high yield opportunities than I've seen in a while. If you're planning on taking advantage, I highly recommend checking out some of the malicious transaction detection tools I shared above. A hardware wallet, malicious detection tooling, and Protocol Cover can save you from losing your crypto across many different attack vectors.

Until next week, here is your reminder that yield is everywhere around us. You just need to reach out and grab it without losing your balance and dropping your bag. I promise I'll be back next week with an overview of the market, yields, and the latest updates.

Stay safe out there, friends.